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Hate Paying Capital Gains Tax?

Sunday, March 24, 2019   /   by Jody Lee

Hate Paying Capital Gains Tax?

Are you selling a property that is not your primary residence? Consider doing a 1031 exchange!

What did you do with the property you are selling? Did you rent it out, run your business out of it, lease it, or is it raw land? As long as it is not your primary residence, it may be a viable 1031 property. Do you plan to reinvest in real estate? Why not consider doing a 1031 Exchange and defer your capital gains taxes!

QUALIFIED INTERMEDIARY

There are very strict rules in completing a 1031 exchange, and the best way to make this happen is to first let your real estate agent know what you plan to do and get yourself a Qualified Intermediary.

One of the most important decisions you will make regarding your 1031 exchange is the choice of whom you will use as your Qualified Intermediary “QI”.  It is crucial to select a QI with professional credentials and extensive experience. They are a crucial part of the planning and assistance during your exchange. If and when you determine that you want to undertake a 1031 Exchange, you must involve the QI prior to the closing of the sale of your property

The QI does not provide legal or specific tax advice to the exchanger, but will usually perform the following services:

    • Coordinate with the sellers and their advisers to structure a successful exchange.
    • Prepare the required documentation for the Relinquished Property (1st Leg) and Replacement Property (2nd Leg).
    • Provide specific instructions to escrow to affect the exchange.
    • Secure the funds in an insured bank account until needed for disbursement to escrow to acquire the replacement property. 
    • Prepare, manage and provide a complete accounting of the transaction to the Exchanger and/or their tax adviser at the completion of the exchange.


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PROPERTY REQUIREMENTS

To meet the requirements of 1031, both the property being sold and the replacement property must qualify. In other words, both the property you are selling and the property you are buying must be a qualified property of like-kind. If not, your exchange will fail and be classified as a sale.  This is so important.

45 DAY IDENTIFICATION

The Internal Revenue Code requires that you identify your potential replacement properties within 45 days of the closing on the sale of your sold property. The 45 days are calendar days, to include Holidays.  There are no extensions allowed.

    • The 3-Property Rule - You can identify up to three potential replacement properties without regard to the fair market values of the properties. 
    • The 200 Percent Rule – You may identify any number of properties as long as their fair market value does not exceed 200 percent of the total fair market value of the relinquished/sold property or properties being exchanged.


180 DAY EXCHANGE

Section 1031 requires that you purchase one or more new properties by the 180th day after the closing of the old property.  You must purchase one or more properties that were on your 45-day identification list.

 

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TITLE REQUIREMENTS

Section 1031 requires that the taxpayer on the property being sold be the same taxpayer on the replacement property. Examples of holding property are corporations, trusts, and LLCs, and if you and your spouse hold title together, then the new property must hold title the same way.

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EQUAL OR UP EXCHANGE

Section 1031 stipulates that in order to defer 100% of the taxes on your gain on the sale of the old property, you must buy equal or up

Can you take money out of the deal?  Yes.  This money (called “boot” by the IRS) is taxable, but can be taken out of the exchange without invalidating the rest of the exchange so long as properly documented.  However, there are only two times when money can be taken - at the closing of the relinquished property, or at the end of the exchange.

This information is not intended to replace qualified legal, tax advice, and or advice from your Qualified Intermediary.  Every taxpayer should review their specific transaction with their own legal and/or tax counsel.

Ready to sell your rental or investment property? Have more questions?

Let me know I would be happy to help and share more information with you!

Jody Lee
Haven Real Estate Group
509-389-1798

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Haven Real Estate Group
Cambria Henry
304 W Pacific Ave; Suite 360
Spokane, WA 99201
509-590-4701

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